RIEB Seminar
TJAR Research Workshop
TJAR Research Workshop
(Hosted by TJAR Workshop, Jointly Supported by RIEB Seminar)
| Date & Time | Friday, June 23, 2023, 10:40 - 12:10 |
|---|---|
| Place | Meeting Room at RIEB (Annex, 2nd Floor) |
| Intended Audience | Faculty, Graduate Students, and People with Equivalent Knowledge |
| Langage | English |
| Registration | Registration is required. The seminar details will be sent to the registered emails. Registration Form (Due: Jun 19) |
10:40 - 12:10
- Topic
- Loan Covenant Violation and Corporate Pension Funding
- Speaker
- Harminder SINGH (Department of Finance, Deakin Business School, Deakin University)
- Abstract
- We find that the level of defined benefit pension deficits increases following violations of loan contracts’ covenants. The increase in pension deficits is more pronounced for firms with underfunded pension plans, lower credit ratings, weaker lending relationships, or weaker bargaining power with the lenders. Following covenant violations, we observe a decrease in the equity-to-debt investment ratio of pension plan assets and no significant changes to pension contributions, or pension plans’ assumed rates of returns and discount rates. Our results suggest that the increase in pension deficits arises from the reallocation of pension assets from equity investments to lower-risk and lower-return debt investments. Overall, our findings highlight that the transfer of control rights to bank lenders following covenant violations can influence the wealth of a firm's employees, in the form of higher pension deficits.